Do diversification amounts in a KSOP include 401(k) accounts?

[Guest jdw]

KSOP has 401(k) employee deferrals and discretionary Employer contribution (non-match). All contributions invested in company stock. Plan does not allow any other investment options, so it satisfies diversification requirement through distributions.

IRC 401(k)(2) and (10) do not allow distribution of deferrals until 59.5, but diversification requires age 55 (assume 10 years of participation).

I originally thought deferrals were excluded from diversification, but 401(a)(28)(B) consistently refers to "the participant's account" or "the participant's account in the plan." To me, that sounds like the entire account balance, not just the employer contribution portion.

Does a participant entitled to diversification distribution get 25% of entire account, or only 25% of employer portion of account?

[BeckyMiller]

Boy - my immediate response is what did the designer have in mind when the plan was established that all employee contributions were invested solely in employer stock.....

But, to answer your question, the required diversification rules do not trump the 401(k) rules. A plan can be designed to meet both rules by diversifying within the trust, rather than making distributions.

This response assumes that the plan is not one of those combined arrangements where the 401(k) is arguable separate from the ESOP. If it is a single ESOP with multiple features, the entire balance is eligible for diversification. You need to then go through the hoops - what does the plan say, when did the shares enter the trust, etc.

I would rush immediately to competent ERISA counsel and get some help for this situation.